What are Upper Circuit and Lower Circuit in Share Market
If you are a trader, you must have heard the terms upper circuit and lower circuit. In India, the upper and lower circuits are mechanisms used to control or regulate extreme price movements or volatility in company stock prices.
Here in this blog, we will dive into what is upper circuit and lower circuit in share market, how they work, and much more.
Read along to get further insights about the same.
Upper Circuit Meaning
The upper circuit of stock refers to the maximum price a company’s stock can achieve within a particular trading session. It is created and set by a stock exchange to reduce or mitigate the extreme volatility of the stock price and protect investors from sudden price movements.
Having a clear understanding of the upper circuit will help investors understand market sentiment, allowing them to make informed decisions, especially during a bullish market.
Companies | Type | Bidding Dates | |
| Regular | Closes 18 Nov | ||
| SME | Closes 18 Nov | ||
| Regular | Closes 22 Nov | ||
| SME | Opens 21 Nov | ||
| Regular | - |
Lower Circuit Meaning
The lower circuit, also known as the lower price band, typically refers to the lowest level to which a company’s stock is permitted to fall during a particular trading session.
When the stock price hits its lower circuit, i.e., the lowest price band for the trading session, trading on that stock is temporarily suspended. It is carried out mainly to prevent a further fall in the price of that particular stock, safeguarding investors and traders from extreme losses.
Ways to Use Circuits on Company Stocks
Here are some of the ways in which circuits on company stocks can be used to your advantage:
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Using Stop-loss Orders
Consider using a stop-loss order to sell the stock if it reaches the lower price band or circuit. This automated facility will automatically sell the stock if the market price of the stock reaches the lower price band, preventing further losses.
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Monitoring the Circuits
Consider keeping an eye on the upper and lower circuits of the company stocks that you are willing to invest in or are invested in. It will help you get an idea of the volatility of the stock and help you make informed decisions.
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Avoid Herd Mentality
Do not just follow others blindly. Just because a particular stock is hitting the upper circuit does not mean that it will continue to rise forever.
Similarly, just because a particular company stock hits its lower price band does not necessarily mean that it will continue to fall or is a bad investment.
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Conduct Proper Research
Do not just invest based on other people’s suggestions. Always try to find out the reasons for the price movements – up or down – by conducting market research.
Consider checking several parameters, such as earnings, debt, PE ratio, P/B ratio, industry PE ratio, shareholding pattern, related news, etc.
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Benefit from Opportunities
If the stock you are willing to purchase hits the lower circuit, it can be a good time to buy. Similarly, if you are willing to sell a particular stock when it hits the upper circuit, it might be the perfect time to sell and book profits.
Factors Driving the Upper/Lower Circuits
There are several factors that can result in the upper and lower circuits of a company's stock. These are as follows:
- Political unrest
- Changes in trade agreements
- Mergers, acquisitions, expansions, and insolvencies
- Change in rate of interest
- Financial performance of a company
- Confidence of investors
The Bottomline
By now, you should have a better understanding of the upper circuit and lower circuit dynamics in the Indian stock market. However, navigating the stock market can be an unpredictable journey, with highs and lows that can leave you confused.
Therefore, it is crucial to approach investing with a well-researched strategy and professional support if needed.